Patent owners may recover lost foreign profits caused by the export of infringing components

The United States Supreme Court has ruled that a patent owner’s damages arising from the export of infringing components in violation of Section 271(f) of the Patent Act may include recovery for lost foreign profits. On behalf of a 7-2 majority, Justice Clarence Thomas opined that the presumption against the extraterritorial application of U.S. law was not offended in this case because the prohibited conduct relevant to the statutory focus was domestic rather than foreign infringement. Writing in dissent, Justice Neil Gorsuch, joined by Justice Breyer, would find that the damage award violated "the bedrock rule that foreign uses of an invention (even an invention made in this country) do not infringe a U. S. patent" (WesternGeco LLC v. ION Geophysical Corp., June 22, 2018, Thomas, C.).

WesternGeco LLC sued ION Geophysical Corporation for infringement of four patents claiming "seismic streamer control and positioning" technologies for facilitating the search for oil and gas deposits below the ocean floor. ION did not directly compete with WesternGeco in providing marine seismic survey services. Instead, it manufactured components of a marine seismic survey system (a device called DigiFIN) that, when assembled with other surveying equipment, embodied WesternGeco’s patented invention. DigiFIN was manufactured and sold to foreign companies that directly competed with WesternGeco for marine survey contracts.

A Texas jury found that ION willfully infringed all the asserted claims under 35 U.S.C. §271(f), which prohibits the supply from the United States of "all or a substantial portion of the components of a patented invention" for combination abroad. The jury awarded $12 million in reasonable royalty damages and $93.4 million in lost profit damages, based on ten ocean survey contracts WesternGeco lost to foreign competitors that used ION’s infringing system. The Federal Circuit affirmed the royalty award, but reversed the lost profits award, on the ground that the Patent Act does not permit the recovery of lost profits for third parties’ extraterritorial uses of a system patented in the United States.

Extraterritoriality framework. The presumption against extraterritoriality assumes that federal statutes "apply only within the territorial jurisdiction of the United States." Foley Bros., Inc. v. Filardo, 336 U.S. 281, 285 (1949). The Supreme Court has established a two-step framework for deciding extraterritoriality questions. The first step asks whether the presumption has been rebutted by "clear [statutory] indication of an extraterritorial application." If not, the second step asks "whether the case involves a domestic application of the statute." RJR Nabisco, Inc. v. European Community, 579 U. S., (2016).

In this case, the Court determined that it was appropriate to bypass step one and decide the extraterritorial question at step two. "While ‘it will usually be preferable’ to begin with step one, courts have the discretion to begin at step two ‘in appropriate cases,’" the Court said (citations omitted). Beginning at step two was appropriate here because step one would require the resolution of "difficult questions" that would not change the outcome of this case, but could have far-reaching effects in future cases, possibly extending beyond the Patent Act.

Step two of the extraterritorially analysis requires identifying the statute’s "focus"—i.e., the object of its solicitude—and asking whether the conduct relevant to that focus occurred in the United States. If so, then the case involves "a permissible domestic application" of the statute, "even if other conduct occurred abroad." Id at__.On the other hand, if the relevant conduct occurred in another country, "then the case involves an impermissible extraterritorial application regardless of any other conduct that occurred in U. S. territory." Id at__.The Court further explained that when determining the focus of a statute, the provision at issue is not to be analyzed "in a vacuum." Instead, if the provision at issue works in tandem with other provisions, it is to be assessed in concert with other provisions.

Domestic infringement. Applying these principals to the Patent Act provisions at issue in this case, the Court concluded that the conduct relevant to the statutory focus in this case was domestic. The Court began with Section 284, which authorizes "damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer." The Court observed that infringement is plainly the focus of Section 284, but added that it was necessary to look to the type of infringement that occurred. In this case, the jury did not find that ION violated the general infringement provision, Section 271(a), which prohibits infringement occurring "within the United States." Instead, the jury found that ION violated Section 271(f).

The Court turned to Section 271(f)(2) as the basis for WesternGeco’s infringement claim and the lost-profits damage award. The jury also found that ION infringed Section 271(f)(1), but that was not addressed by the Federal Circuit in its opinion below. Section 271(f)(2) prohibits supplying or causing to be supplied in or from the United States "any component of a patented invention that is especially made or especially adapted for use in the invention and not a staple article or commodity of commerce suitable for substantial noninfringing use … intending that such component will be combined outside of the United States in a manner that would infringe the patent if such combination occurred within the United States."

The Court determined that Section 271(f)(2) focuses on domestic conduct, i.e., exporting infringing components from the United States. "The conduct in this case that is relevant to that focus clearly occurred in the United States, as it was ION’s domestic act of supplying the components that infringed WesternGeco’s patents," the Court said. "Thus, the lost-profits damages that were awarded to WesternGeco were a domestic application of §284."

The Court also found that ION’s contrary arguments were unpersuasive. ION contended that the statutory focus was on the award of damages. However, the damages themselves "are merely the means by which the statute achieves its end of remedying infringements," the Court observed. ION also asserted that this case involved an extraterritorial application of Section 284 because the lost-profits damages occurred extraterritorially and required foreign conduct. The Court disagreed. "These overseas events were merely incidental to the infringement," the Court said. "In other words, they do not have ‘primacy’ for purposes of the extraterritoriality analysis." Finally, in asserting that damages awards for foreign injuries are always an extraterritorial application of a damages provision, ION misread a portion of RJR Nabisco, which interpreted a substantive element of a cause of action, not a remedial damages provision.

"Taken together, §271(f)(2) and §284 allow the patent owner to recover for lost foreign profits," the Court concluded. The Federal Circuit’s decision was reversed and the case remanded.

Dissenting opinion. Writing in dissent, Justice Neil Gorsuch, joined by Justice Breyer, did not take issue with the majority’s finding that WesternGeco’s lost profits claim did not offend the judicially created presumption against extraterritoriality. Instead, Justice Gorsuch disagreed that such an award was permitted under the terms of the Patent Act. A U.S. patent does not protect its owner from competition beyond our borders, Justice Gorsuch said. The award in this case violated "the bedrock rule that foreign uses of an invention (even an invention made in this country) do not infringe a U. S. patent," according to Justice Gorsuch. "Permitting damages of this sort would effectively allow U.S. patent owners to use American courts to extend their monopolies to foreign markets. That, in turn, would invite other countries to use their own patent laws and courts to assert control over our economy. Nothing in the terms of the Patent Act supports that result and much militates against it." The majority remarked that Justice Gorsuch’s position wrongly conflated legal injury with the damages arising from that injury.

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